EFRAG - Financial statements too complex

19 Feb 2014

Financial reporting needs to be simpler – that’s the message from Europe’s lead advisory group on the topic, the European Financial Reporting Advisory Group (EFRAG).

EFRAG has issued a paper for comment as part of its strategy to stimulate the debate on complexity in financial reporting. ‘Getting a Better Framework: Complexity’ was written in collaboration with the French, German, Italian and English national standard setters.

Complexity, EFRAG says, impedes effective communication between companies and stakeholders and “creates inefficiencies in the markets”. The premise of the group’s paper is that ‘additional discussion’ in the International Accounting Standards Board (IASB)’s conceptual framework for IFRS could help minimise complexity in the resulting accounts.

Though EFRAG does not specifically define ‘additional discussion’, it is clear that it means for the IASB to include guidance in the conceptual framework that enhances understandability (particularly in presentation and disclosure) and helps preparers find a cost-benefit balance (ie, the required accounting should be “as easy as possible to achieve a faithful representation of relevant information”).

But EFRAG argues that complexity isn’t just a preparer’s problem. It says that complexity often arises in the making of the standards, not just in their application.

The paper highlights six areas where EFRAG says avoidable complexity commonly arises and can be avoided, namely:

  • Standards that require classifications that some regard as arbitrary
  • Standards that include anti-abuse measures
  • Standards that depart from the underlying economics of the transaction
  • Standards that assume one approach fits all transactions in the scope of the standard
  • Standards that include exceptions to principles
  • Standards that require the recognition of estimates that some regard as too subjective to be reliable.

The IASB is already currently reviewing the conceptual framework for IFRS, with an eye to reducing complexity. It suggests some additional guidance on the application of the materiality principle, and on presentation and communication principles, which are currently considered to be ineffective. It asked respondents to consider whether its suggestions for enhancements to the guidance on these matters were appropriate.

The IASB proposes that the conceptual framework should contain guidance sufficient for standard setters to develop rules that promote effective communication. But it also proposes guidance that encourages the preparer to produce reports that are as entity-specific, clearly organised, balanced, understandable, well-linked and as comparable as possible.

It seems as though the regulators and standard setters are on the same page in this case. Both are concerned that any new guidance should reflect the need for financial statements to ‘tell the story’ with concise and consistent terminology, and enable preparers to exercise their professional judgement on matters of materiality.

EFRAG’s paper is open for comment until 30 April 2014.